What rate of inflation should you assume for purposes ofclients’ long-range planning, including retirement needs analysis?

If you are focused only on the Consumer Price Index (CPI), youmight assume a rate such as 2.0 percent, the average annual CPIincrease over the last 10 years.

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However, there is growing evidence the CPI understates the realrate of inflation many clients are facing.

So, perhaps a better question to ask is: Which clients maybe facing more inflation than they think?

For the answer, look to several alternative calculations of U.S.inflation, none of which are published by the U.S. Government. Herethey are:

#1: John Williams’ Shadow GovernmentStatistics

This is the oldest among the three. Williams has continued tocalculate CPI data based on the U.S. Bureau of Labor Statistics’methodologies before modifications were made in 1990. His dataindicates that without the 1990 changes, the CPI would haveaveraged about 3-4 percent more than reported annually over thepast 25 years.

#2:The State Street PriceStats InflationSeries

In 2008, an ambitious undertaking called The Billion PricesProject @ MIT was launched to scour the Internet and capturereal-time prices. In the U.S., this data has become the StateStreet PriceStats Inflation Series.

It is updated daily (not seasonally adjusted) and has shownabout the same readings as the CPI over long periods of time,although it is more sensitive to short-term price shifts. Forexample, this year, the index increased sharply from a low of -1.2percent in January to +.6 percent at the end of May.

#3: The Chapwood Index

The newest and perhaps most controversial inflation data is theChapwood Index published by Chapwood Investments. Since 2011,Chapwood has gathered data on prices of 500 commonly-purchasedgoods and services in 50 major U.S. metropolitan areas.

For calendar year 2014, Chapwood says the highest annualinflation rates in the U.S. were in California cities:

• San Jose (13.7 percent)

• San Diego (13.1 percent)

• Long Beach (12.9 percent)

• San Francisco (12.7 percent)

The lowest annual rates were in these cities:

• Colorado Springs (6.6 percent)

• Albuquerque (7.1 percent)

• Wichita (7.4 percent)

• Jacksonville (7.6 percent)

The Chapwood Index raises eyebrows mainly because itconsistently puts U.S. inflation so much higher than the CPI. Butit also reveals truths that the CPI masks—such as escalatinghousing costs in California cities.

According to the CPI, average U.S. shelter costs have increasedjust 3.0 percent over the last 12 months.

Showing your clients the Chapwood Index will help to emphasize akey point—namely, inflation doesn’t affect all areas of thecountry, or all households, the same. Right now, it’s havinggreatest impact on people who live in cities, rent, have largefamilies (groceries), pay their own health care premiums, or havechildren in college.

The best way to determine each client’s personal rate ofinflation is to track actual household expenses, much as Chapwooddoes. Many clients may find that their own personal rate ofinflation falls somewhere between CPI and Chapwood.

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